Private equity general partners believe the current high interest rate environment poses the greatest threat to performance, new research from Moelis & Company shows.
About two-thirds of GPs responding to Moelis’ second Private Markets Insights survey agreed that high rates were the biggest cause of concern for making good returns, as did 41% of LPs.
Despite that, just 14% of LPs have shifted their PE investment approach since the fed began raising rates, while the survey also found a lack of consensus in LPs’ macro outlook, with 41% of LPs saying the anticipated timing of a US recession was “unclear”.
Rodney Reid, managing director and head of private funds advisory at Moelis, said, “Lack of clarity in the macroeconomic environment continues to be an overhang on both LPs and GPs, underscoring the challenges that the PE community faces in putting capital to work.
“While most managers and investors are not looking to overhaul their strategies, the disruptive macro environment has created pockets of opportunity for both LPs and GPs to re-tool, refine and redirect their efforts.”
Re-ups remain an important piece of LPs’ planned allocations according to the survey, with 66% of LPs expecting to dedicate at least 75% of 2023 allocations to re-ups.
Just under two-thirds said they were not planning to cut back on new GP relationships, while 61% anticipate having capital to deploy into the second half of the year.
Emerging technology including AI and the energy transition were popular themes, with 64% and 54% of LPs, respectively, indicating interest according to Moelis.
Professional sports investing was interesting to just over 20% of LPs, while just 12% indicated an interest in blockchain assets.
Moelis’s survey also found that more than 75% of LPs consider ESG in some way during the underwriting process, but just 26% have strict guidelines on ESG that they are prohibited from violating.
A hefty 92% of GPs said LPs were requesting more reporting and data on ESG and DEI since 2020, and 67% of GPs now have either a dedicated in-house professional or a third-party service provider – or both – focused on ESG & DEI.
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